“I used to joke that 95% of investing success consists of knowing what not to do,” Jason Zweig writes this weekend. “It’s rapidly approaching 99%, and it’s no longer a joke.” He has the filings to prove it.
At least three sponsors have filed for exchange-traded funds that go up or down based on which political party wins upcoming elections. More than 100 proposed ETFs are tied to the real-time statistical performance of National Hockey League teams, including 32 that would double a team’s daily swing. Since the SEC streamlined ETF launches in 2019, the industry has shipped funds that track single stocks with leverage, use options to manufacture triple-digit reported yields, and, in one case, invest in technologies that might be used by UFOs.
The fee story hiding inside the fun story
The part of the column that belongs on a refrigerator is a Morningstar statistic: 49% of all ETFs now charge at least 0.5% a year, up from 42% in 2019. Over the same period, boring old mutual funds got cheaper. The ETF wrapper earned its reputation with funds like the iShares Core S&P 500 ETF (IVV) and Vanguard’s total-market fund, which hold more than $3 trillion between them and charge 0.03%. The new arrivals borrow that reputation and charge for it.
“Investors are under a kind of two-pronged attack,” ETF.com’s Dave Nadig told Zweig. “The culture is pushing everyone toward speculation and gambling at the same time as the financial markets are getting deregulated.” Dave Mazza of Roundhill, which runs 55 ETFs, said it without defensiveness: “Once you open the door for things of this nature, it’s hard to say what’s right and what’s wrong.”
Zweig’s history lesson is the sharpest part. In 1927, 5% of all funds had the bulk of their assets in a single investment; by 1929 more than an eighth had at least a quarter in one holding. One of them put most of its money under Ivar Kreuger, the match king, and was dissolved after his empire collapsed. Hyperconcentrated funds are not a new idea. They are an old one that federal regulation was invented to end.
The four questions
Before any new ETF, Zweig asks: Is this the easiest and cheapest way to accomplish my goal, and how does it fit the rest of the portfolio? Does it serve an investment purpose, or is it a gamble? If it is a gamble, how will I keep it away from the long-term accounts? And, most important, how will I limit my losses — and how badly would I regret them?
Our read
This desk builds books out of ETFs and is not shy about it: the reserve is a Treasury-bill fund, the gold sleeve is a bullion trust, the equal-weight index is the first thing the reserve buys at a drawdown. Every one of those is a plain wrapper around a plain thing, and each costs a few hundredths of a percent. Jason Zweig’s point is not that ETFs went bad. It is that the label no longer tells you what is in the tin, and that half the tins now cost what an active fund used to.
The bet on the Anaheim Ducks is the tell. If you want to make it, put the game on and toss $20 on the coffee table. The moment it gets a ticker, it starts to feel like an investment, and it starts living in the same account as your retirement. That is the contamination he is warning about, and it is the one we see most often on a statement: not a bad fund, but a wager wearing a fund’s clothes, sitting beside the money that cannot afford to lose.